Sporting Goods Retailers
Date May 2016
Approximate net recovery on cost
- During the first two months of 2016, retail sales at U.S. sporting goods stores rose 9 percent over the same period in the previous year
- Sporting goods stores’ revenue is anticipated to grow at a rate of 2.9 percent in 2016
- Industry revenues: $47 billion (U.S.)
- Major product categories: Outdoor clothing, footwear, firearms, sports and exercise equipment, camping equipment, bicycles
- Significant companies: Bass Pro, Big 5, Cabela's, Dick's Sporting Goods, Hibbett Sports, REI
- Market share of top: The top 50 companies generate approximately 60% of industry revenue
- Industry trends: U.S. personal income, which drives how much consumers might spend on sporting goods, increased 4.0 percent in February 2016 compared to the same month in 2015
Liquidations redefining the industry: After filing for bankruptcy on March 2, 2016, national sporting goods retailer Sports Authority engaged Gordon Brothers and a joint venture partner to assist in the closing of 142 stores and two distribution centers in an attempt to reorganize while looking for a buyer. As of the filing date, Sports Authority had $430.0 million in assets and $1.51 billion in liabilities. After conducting a sale process and finding no suitable offers, Sports Authority notified the court it would pursue a total asset sale. Gordon Brothers, and its joint venture partners, was the successful bidder in an auction process and began closing the remaining 321 stores on May 26, 2016. Sports Authority’s closing follows the announcement in mid-April that going-out-of-business sales had begun at all 47 Sport Chalet stores in California, Arizona and Nevada.
Many sporting goods retailers like U.S. market leader Dick’s Sporting Goods and other national and local chains will soon benefit from reduced competition. First Research notes that, although the sales momentum driven by liquidations may present a short-term challenge due to aggressive discounting during going-out-of-business sales, on a long-term basis, competitors should benefit from the departure of two major names in the highly competitive retail sporting goods market.
Further industry consolidation may be imminent. In December 2015, Cabela’s announced it had engaged Guggenheim Securities LLC as its financial advisor to explore strategic alternatives. On a positive note, although comparable store sales were down, Cabela’s reported first quarter 2016 sales increased 4.5 percent to $864.7 million, primarily a result of new store openings.
As retail sectors of all types weather sales volatility and industry consolidations, it is increasingly critical for asset-based lenders to partner with appraisers who have a deep understanding of current market conditions and who are willing to deploy capital should a company face a liquidation scenario, whether inside or outside of bankruptcy.
Internet channel expanding: It’s clear those retailers that have embraced and invested in an omnichannel philosophy have fared better in the current climate. Dick’s reported e-commerce penetration for the 52 weeks ended January 30, 3016 of 10.3 percent of total net sales, compared to 9.2 percent during the prior period. Penetration in the fourth quarter of 2015 was even higher, at 15.7 percent. This is a trend the company expects to grow.
Academy Sports + Outdoors, a regional discount sporting goods retailer, opened a 1.6 million square-foot distribution center in Cookeville, Tennessee to support the growth of stores throughout the Midwest and its growing e-commerce business. Academy generated annual sales of $4.6 billion in 2015.
Dick’s and Academy are just two examples of retailers that are adapting to changing buying behaviors by expanding their omnichannel presence. Similarly, lenders to the sector should seek out appraisers with experience valuing omnichannel businesses. Expect inventory valuation models for sporting goods retailers to offer an internet channel option.
Changing tastes and seasonality impact recoveries: The popularity of various sports has changed in the last decade; running, gym workouts and target shooting have increased in popularity, while golf, in-line skating, skateboarding, and cross-country skiing have decreased according to a recent survey conducted by the National Sporting Goods Association (NSGA). Participation in tackle football among children has also fallen, as safety concerns have been publicized. Among teenagers, participation has dropped in most activities over the past decade, with the exception of aerobics, archery, walking, equipment-based exercising, ice hockey and kayaking. Additionally, women’s participation in sports is driving much of the growth in popular sports. As consumers’ tastes for sporting activities change, expect a corresponding change in demand for the associated equipment and gear.
The performance of national sports teams can also have a significant effect on retail sales in localized geographies. Double digit regional sales increases can be seen following national sporting events such as the Superbowl and The World Series. This coupled with the seasonality of various sports are primary drivers of gross recovery values for sporting goods. Retailers stocking wide assortments of seasonal gear must carefully manage inventory levels to sales volumes to maximize value. To the extent that seasonal or slower moving inventory is not managed effectively as part of the normal course of business, it may become challenging to sell through in an off-season liquidation event, resulting in lower gross recovery values in certain categories. Gordon Brothers recommends that lenders partner with appraisers in requesting annual seasonal models to address swings in net recovery values and their potential impact on availability.